Q. In an interview with Real Deals last year, you said: “Software is no longer all positive. Frog is increasingly focused on socially positive companies. So ESG (or what we call Responsible Investing) is core for us and our portfolio and we consider this from the outset of our investments.” What has changed in the past year with regard to how you approach responsible investing?

A. What's changed is the theme. We’re being crisper around what our strategy is, what fits and what doesn't fit. There's a lot going on in the industry in terms of the ESG frameworks and we've been reviewing that since our last conversation - what frameworks are being used, how to recognise a useful framework etc. because if we develop our own, people won't understand it. So, it is best to pick what we think are globally recognisable standards and then start using those as the starting point for a lot of people who engage with PRI, SDGs, etc. We're just doing our quarterly evaluations now, and for the next quarter, our objective is to set priorities for the portfolio. For example, we want to start measuring the promotions of female employees. If a business has got a certain number of females, but they haven't actually promoted anybody the whole year, it doesn’t make sense. We are starting to use a different kind of thought process and a little bit of smart questioning to actually shift behaviour.

Q. How do you plan on bringing this renewed focus on ESG into your existing framework? 

A. As we developed the Frog Capital funds, we never really articulated the ESG thinking on the type of deals we do in the way that the language of the industry does, until recently. We have done a lot of deals that will be considered to have a positive societal impact, but for this next phase, we are putting a lot more clarity on that. Several things are happening - one is communication in terms that make sense to the LP universe. PE investors talk about ESG, they talk about frameworks, so they want to hear that kind of language. But when you talk to entrepreneurs, they don’t talk that language. We are at a crossover between two different worlds, so the communication of the messaging we are doing now to LPs has to be clear. One framework is the UNPRI, which we are a part of. Then the next layer is the IMP (impact management platform), a structure that enables you to actually assess each investment and company in a certain way, which is more granular than UNPRI. Then in terms of measurements, we are working with a company called Metric, a Canadian data collection business.
So there is a really strong messaging around the whole theme of purpose-led scaling - the language is just very different from what LPs think. 

Q. Do you consider it to be a new strategy for Frog? Is the focus of your investments going to change drastically? 

A. I wouldn't call it a new strategy, I would call it the next stage of an existing strategy. Our core focus is growth equity in the European software industry. The key to that is we are tracking all of the early-stage venture capital activity and cherry-picking distinct companies coming through the VC world, into what we would call the scale-up world. When portfolio companies are entering an institutional growth phase, internationalising their company, bringing much more processes and rigour into the businesses, looking at a path of profitability, they are looking for a certain type of scale-up expert to be an investor, and not just the money. There is so much to do around that core proposition that the priority hasn't really been ESG in the past. It's not a massive differentiator, so it's only over the past year or so that we have been faced with a decision to say either you are a tick-box ESG fund, or you are actually doing something different - and we genuinely believe that we are doing something different. So that is what sort of kicked us into action. We’re not changing direction, we’re still focused on scaling really strong businesses, but we’re tightening up focus on those that are making a positive impact on society. 

Q. What is the reason behind refining your ESG approach right now, when macroeconomic headwinds are so strong in Europe?

A. Ultimately our belief is that software has proven to be resilient through difficult times. Additionally, the battle for talent in the technology area is extreme. The younger generation is finding it far more appealing to work for purpose-driven companies where they get up on a Monday morning and actually feel positive about what they are doing in their careers. It then translates into stronger financial performance, retention of employees, and a more valuable company. Our belief is that our companies in the longer term will be increasingly attractive to M&A buyers because they would not only be performing well but will themselves become changemakers in the acquired business. 

Q. Do you feel that focusing on ESG is harder for a smaller, growth equity investor as opposed to a bigger PE house?

A. Of course, one of the benefits of being a big investor is that you’ve got money to hire an ESG consultant. But on the contrary, the competitive advantage of being on a smaller scale is that we can integrate thinking on top of things very quickly. So we don't have a head of ESG, we are three partners, and we spearhead our ESG and responsible investing decisions. Therefore, we're more involved with the team to make it happen. 

Q. Is your focus on ESG and social impact therefore impacting your own hiring strategy now?

A. We are in the process of hiring two people at the moment and the feedback is brilliant. These are people who are in their late 20s, 30s even early 40s and have got options when it comes to where they could work. They want to feel a balance of commercial momentum and being part of a scaling, growing firm, but they definitely want to feel the impact they are making on the world. Some people come from very commercial organisations and say this is really refreshing because we are so close to our portfolio companies and are able to influence them - as opposed to, say, a private debt fund where that ability to change things is not really there. So it is definitely important in our recruitment process, it resonates fantastically well, and it is differentiated compared to a lot of funds that are just not quite there yet. 

Q. Looking more broadly at the economic environment and how it has changed since we last spoke, do you think your core strategy (and your investors’ appetite for it) will be impacted in this context?

A. I think there won’t be any change. The discipline of building long-term profitable companies has become more important post the tech correction. One of the areas of the economy that has performed well through recessions is software. And therefore, within that environment, innovation and growth capital have a really strong place.